A new saving and payments system

The interface between you and your bank used to be the branch. Today banks give your computer sufficient access to their computer over the net to let you do it all yourself.

Reengineering of the interface is happening everywhere as government agencies from the ABC to the ABS let us search and download their content anytime, anywhere. And in the UK where theyre sufficiently alive to such possibilities to have a Minister for transformational government, theyre taking things further.

For instance their National Archives are moving to provide and enable so that your computer gets to mess with their computer. The archives are no longer to be a collection of documents. Theyll be a database of content which users can search, gather, repackage, repurpose and republish.

In a similar way we could transform another interface to build a simpler, safer financial architecture for our savings and payments, an architecture capable of keeping your money safe during the worst depression or financial crisis.

You deposit money in the bank because its safe (mostly), earns interest and can be paid to anyone in the banking system. But why dont we deposit money with the Government? After all its safer. And the government typically pays money market lenders higher rates than are available from a bank account.

Actually you can still buy a bond from the Reserve Bank. And buying war bonds used to be a patriotic duty and household portfolios often held Board of Works paper.

But its pretty marginal now for two reasons. First, governments have had less debt to sell (theyve been under-investing and running down assets, but thats another story). And financial innovators have repackaged government paper providing liquidity and convenience in cash management trusts.

But the internet now allows governments to go one better at the blink of a cursor. A modern government could give citizens internet access to bonds and the liquidity of an at-call account somewhere near the overnight cash rate.

The functionality of our system is maintained only by the states implicit assurance that fiat money will be kept in sufficiently scarce supply. So it is odd for citizens who must hold that money to be denied a way of storing it with complete security at the going interest rate.

If we had such a system, we could let account holders pay each other by just logging onto their friendly government website and transferring the funds just as they do with bank accounts now. None of this should be subsidised. But the full cost could be met at be a tiny fraction of current bank margins or the 0.25 percent commission the RBA charges to sell you a bond to cover the costs of its paper based system (or is it just to avoid competing with the banks?).

In fact most of us already have accounts with the government via the Tax Office. So all we need is a bit of joined up government and were on our way!

Meanwhile our existing payments system which is a paper based payments system supercharged with modern IT Dickens on steroids could continue whirring and whirling away with its 24 hour payment cycles, counterparty risks and high costs.

But the government system would create a competing payments system that was less comprehensive, but simpler, cheaper, faster (hows instantaneous for fast?) and, on account of that, as safe as money itself.

It would also lower the cost of borrowing for the states, or improve the budget bottom line for the Feds. Right now the Feds keep borrowing $50 billion from the bond market not because they need the money, but to keep the bond market functioning to improve the health and security of the capital market. The money the Feds borrow ends up in the Future fund earning higher returns than the interest on the money.

The same goes for what Ive proposed, which would likewise improve the health and security of the financial system, further swell the Future Fund and build higher government surpluses over time.

Why hasnt anyone done this before? Well, it would be seriously unpopular with the custodians of the current monopoly payments system the banks.

Still, just as banking worked out a bright future for itself the last time this kind of thing happened as state fiat money displaced bank issued notes as the preferred medium of exchange it would ultimately move to thriving where it was adding most value.

The share of the economy devoted to financial services has roughly doubled even as unit costs have plummeted since the seventies. So I doubt therell be any shortage of productive work for private financiers.

Where is the lack of competition in the savings market? We have all sorts of savings products coming out of our ears. The oldest cash management system (at least the oldest one I recall) is Macquarie’s offering 6.82% today, which isn’t bad for small amounts up to $5,000.

Furthermore the treasury stopped issuing short term treasury notes as it has no need for short term funding. I think the shortest period is now 2 years.

I believe retail accounts can still bid for bonds.

Sorry some other questions

Why would the Feds want to intervene on states behalf in terms of helping them manage their own funding? It shouldn’t be up to the Feds to do this. In fact it could cause all sorts of conflict with other funding arrangement and would blur the demarcation.

How would this activity lower the Feds cost of borrowing if they are already in surplus?

Current bond issuance I believe is done to create a tracer for benchmarking so it’s not for financial management reasons other than helping guide the financial markets.

How exactly would borrowing directly from retail help the government’s bottom line during a time of surplus.

And finally why do we need a bigger surplus and how exactly would it be achieved by running a cash man.

I don’t think it would only be the banks opposing this, the RBA wouldn’t be too keen on the idea either as it could cause all sorts of problems with their own cash management and interest rate guidance.

We should also have governments add costs to private food sales. Then they could provide us with government food below private food costs. The government food would be less comprehensive, but simpler, cheaper, faster…

hmm why stop there?
Lets have the government plan all goods and services.

Thank god the government knows how to spend my money better than I do.

Perhaps you could break up your consideration of the idea into two JC. I’ve argued in another context (pdf) that where they have negative net debt governments should manage their balance sheets as private companies do, by borrowing up to some point judged prudent where they have opportunities to invest at an expected rate of return that substantially exceeds the cost of borrowing. You probably disagree with this so you can rest on that in opposing what’s been proposed.

Then you might like to consider the more usual situation for governments (both in Australia and elsewhere) of having substantial net debt. I would argue that everyone should have access to that bond market (not subsidised access) and that in the age of the internet the transactions costs involved in giving citizens access to it is small. It would also be very simple and sensible to allow the resulting accounts to make payments to one another.

Anyway, dividing the problem up in that way might help you decide what in the proposal you agree with – if anything – and what you disagree with.

Interesting thought about the possibility of a competing payments system to that run by the banks. A report by the then Federal Department of Communications, Information Technology and the Arts in 2006 explored future electronic payments markets in Australia (see http://www.dcita.gov.au/__data/assets/pdf_file/0013/40522/Exploration_of_Future_Electronic_Payments_Markets.pdf). It found a potential resource saving in the order of $2 billion per year if there was a greater shift towards lower cost electronic payments instruments. My personal view is that just as there is a regulatory role for the RBA in monitoring the cash system in Australia, there is an equally valid regulatory role for them to manage some form of electronic cash system within Australia which would use modern technology rather than the old EFTPOS and other payments instruments. Linking this into small business accounting systems would be a boon and negate the need for so many cheques and paperwork. Transferring money from person to person would also be cheaper – and why not use the mobile phone? Lots of possibilities but there is not enough push within the system for innovation to turn this into a reality.

I can see an opportunity for transactions that occur between business and government in the same way as tax, especially GST, is handled. For instance the way COMET funding, and I presume all other forms of government assistance, is processed is positively antidiluvian. Certainly it would make dealing with AusIndustry much more efficient to be able to access an approved account and draw down electronically.

Nicholas,
I would encourage you to look at the Japanese postal savings system to see where this leads. Where the savings are both risk free (as they are explicitly backed by the printing press) and competitively priced the bulk of savers tend to use it, producing a huge pool of savings that is fully subject to political control – the results in Japan have not been pretty.

Frankly Nicholas, I think you’ve summed up the banking side of the domestic finance game very well with this …

“Still, just as banking worked out a bright future for itself the last time this kind of thing happened as state fiat money displaced bank issued notes as the preferred medium of exchange it would ultimately move to thriving where it was adding most value.”

‘Most value’ mean shareholder profit. There is no value adding being undertaken anywhere in the industry on behalf of customers like you & I. Banks, per se, in this country no longer look after their customers and haven’t done so for nearly twenty years now. Banking, once centred on service, is today centred solidly on sales, sales, sales at the expense of service. Service costs money. Shareholder profit takes precedence over customer satisfaction in every respect of the business. The computerisation of customer access to service speaks volumes for the lack of care the industry has for it’s customer base, be they mum & dad or corporate. I remember telling customers the required line when ATMs were first introduced into this country. Free access, no waiting in queues, efficient and convenient. Today, with a dedicated populace totally reliant upon technology in all of it’s stripes, we see nothing technologically oriented in banking which is free, and by definition, a service.

As to competition…it exists only when the cabal of the major & minor arcana in banking decide it ought to for appearance purposes.

It would also lower the cost of borrowing for the states, or improve the budget bottom line for the Feds. Right now the Feds keep borrowing $50 billion from the bond market not because they need the money, but to keep the bond market functioning to improve the health and security of the capital market. The money the Feds borrow ends up in the Future fund earning higher returns than the interest on the money.

I’d argue that they shouldn’t have done this. If the government is debt free then let the bond market run dry I say.

as state fiat money displaced bank issued notes as the preferred medium of exchange it would ultimately move to thriving where it was adding most value.

Displaced isn’t really the right word. In Australia the Bank Notes Act of 1910 forced banks out of this area of business (ie taxed private notes into oblivion). Quite deliberately and in my view maliciously. Prior to this state issued notes and bank issued notes had circulated in parallel for eons.

You have not explained why your proposed system would be cheaper other than waiving around the notion that big and simple is easy and cheap. In theory yes, in practice I suspect not. And logically they would have to start small if we were also allowed to stick with the existing payment system because people are conservative in their decision making.

Andrew thanks for your contribution. I thought that the Japanese postal savings system involved very low rates of interest and that it was a bit of a mystery as to why it attracted so much money. Perhaps that is wrong – or out of date.

The banks DO compete though not as vigorously as I’d like. But just like the people in Perth ~60% of whom said they wanted glass milk bottles back – with only ~3% or so buying them when they did bring them back – people say they want service in banks, but don’t want to pay fees for the service.

I get a lot better service from my banks’ giving me access to the payments system over the net and cash through ATMs than I ever got from branches – which I stopped using when I gave up my ‘passbook’ in the early 1970s.

I presume you can use a computer if you post comments here. I also appreciate I could be making a huge leap of faith but just what are the services you feel you’re not getting at the moment……… that you’re unable to get over the phone (more so through the web) compared to the 60’s.

I would argue that everyone should have access to that bond market (not subsidised access) and that in the age of the internet the transactions costs involved in giving citizens access to it is small. It would also be very simple and sensible to allow the resulting accounts to make payments to one another.

I would argue that the last thing the RBA wants to do is manage bids from thousands of small punters wanting to buy $5,ooo worth of bonds. It would be a real headache for them as they are more interested in getting money in bulk if they need it as the administrative costs are far less.

You realize the complexity of moving stock around with Link stock services etc. and others service providers that make a business out of it simply because no one wants to deal with that stuff. Bonds would be about the same. People changing addresses, moving bonds from that account to brokers etc. to support stock purchases. Paying interest… etc. It’s not as easy as it sounds setting up a retail money shop, nic.

And the system complexity would be enormous. When banks talk about changing systems or upgrading firm wide software they’re sometimes talking about a couple of billion dollars. Andrew Reynolds would have a better handle on that one. But I recall our firm was making a change over in the wholesale banking side of its software and it was going to cost around $2.5 billion. That was just wholesale and about 7-8 years ago.

I don’t think the spread would be worth it when all is said and done.

And I disagree as I think competition is okay. It all depends on what you want. If you want no frills banking then these guys are as good as anyone. They pilfer though. Run an account 20 bucks in overdraft and they’ll hit you with a 40 buck fee, so they are pricks. However the no frills side works.

If you want top service like Niall seems to demand then you have multiple choices. There’s JP Morgan private banking but they require $5million in liquid assets. Show them that kind of brass and they’ll whore themselves for anything. The others are doing that kind of thing too, but it’s expensive despite getting more personalized service such as a private banker at your beck and call even arranging footy tickets.

The point is that we have a huge amount of products floating around and banks are only a part of the suite.

Think of this.

Say the cost of setting it up is $2 billion for software. Add the manpower etc and you end may end up with say 8,000 people costing about 50 grand each.

That’s just $400 million salaries right there. Write off the system every five years and you end up with $400 million there two. Add another $100 million for other costs and your total annual bill is $900 million.

Lets say you ended up with an asset base of $50 billion. The admin costs would add around 180 basis points to your cost of funds.

So you would be competing with say Macquarie’s cash management account offering 6.8%. That’s a hard nut to crack.

This may seem to be a little off-topic, but your description of what the UK National Archives are doing made my blood run cold. This is such a bad idea, for two reasons just off the top of my head.

It’ll be (probably already is) a security nightmare. How much access to people have to the archive computers? Can they change data?

It’s also possible the databases (unlike paper documents) will end up being unreadable in 50 or 100 years time, due to changes in technology. About 25 years ago, the British did a Domesday Book II, very multi-media, cost heaps, on 12″ laser discs, readable with, I think, the Archimedes personal computer (which was pretty advanced at the time). A few years ago, someone who had a set of the discs thought “Shit! Can we still read these?” and the answer was almost “No.”

Please don’t dismiss me as a luddite. I’m an IT Professional (removes tongue from cheek). There are already lots of software and data stored on punched cards, 9 track tape, etc, which are no longer accessable because there are no longer any working devices to read them. There’s also a lot of software which still works (often on a simulator of its original environment running on a more modern machine) for which the source code and original design documentation no longer exist. That is, if there’s ever a serious problem with it, it’ll be unfixable.

Isn’t this one reason why a number of govts – like the Massachusetts Govt for instance – are promoting open standards, which should remain readable. Also in the age of the internet, it seems to me to be unlikely that major standards will be stranded – won’t people build converters and won’t those converters be kept somewhere accessible on the net? Not that I’m any expert.

Open standards are certainly useful, Nicholas, but any problems with reading the stuff are more likely to be because we no longer have the hardware to read the medium the data are on. For instance, how many people still have a 78 RPM record player, or a machine to read Edison wax cylinders? Or, for that matter, a punched paper tape reader?

The thing that concerns me is that, while a lot of data will get converted from one format to the next, a fair bit of it won’t. (In fact, this has already happened.) Additionally, I’d be very surprised if our modern digital media have anything like the longevity of paper or parchment. The point I was trying to make in my earlier post is that the original Domesday Book came very close to still being readable long after the new one wasn’t any more – a lifespan of at least 1000 years asgainst one of perhaps 25.

This is going to make it difficult to write company histories in future, just for a start.

JC, you miss the point of my comment, as usual. These so-called technological services were promoted as free and gratis to suck in the populace. There was never any intent by Banks, per se, to maintain those services free and gratis, but of course, the Banks never made that public knowledge until it was too late for those dedicated users.

Nicholas, I doubt you’re old enough to remember real customer service in Bank branches, but rest assured, it did exist. With due respect, milk bottles and competition within the domestic Banking game don’t seem to be relevant parallels to me. Have you experienced the inner workings of the cabal, I wonder?

Sorry Niall, but I’m not sure why what you’ve said is relevant. They once had better service in banks. Well it was a ‘service’ culture of sorts (at least during banking hours). So what point does that make? They used to put petrol in your car, but now we do it ourselves. That we prefer doing it that way is revealed by the fact that those petrol stations that kept someone on to fill your tank – and there were plenty of them – couldn’t compete with the ones that didn’t. End of story.

So if service inside bank branches has gone down, so what? However service outside bank branches has improved. I can just log on to the computer and do my banking. Or I pop down to any old ATM at any old time and get some notes. I call that service.

Still maybe it’s more consoling to lament the days when one needed to go see a bank teller with one’s passbook. I’ll leave that to you.

Nicholas, I’m not lamenting passbooks or the advent of technology. I’m lamenting the three card trick deliberately played by the Banking industry when technology came on stream. Technology was ‘sold’ to customers (remember them? You used to be one) on the basis that it was FREE OF CHARGE. You seem to be happy paying for something which was sold to you as costing nothing. If that’s okay with you, then, as you say, I’ll leave that to you. From my perspective as an insider, I find it unethical at best. In so far as service inside branches has gone down, in your terminology, how would you know if you claim to be only too happy not to be bothered finding out?

The crux of my comment, as I’m sure you’re well aware, is that competition doesn’t exist to the benefit of the customer. The same products are offered by a cabal of institutions expressly intent on making profits on the pretext of offering service. There was a time when service secured custom. I’m disappointed that today’s business world, driven by greed, pretends to offer service, while actually putting out the hand for silver before granting anything in exchange.

We move with technology because the pace of life demands that we do so. No-one will ever convince me, however, that the ‘cost’ of real service will ever out-weigh the benefit of doing so. Business management theorem dictates this as fact. I’m sure you’re aware.

Oh, and by the by……just what is the parallel between glass milk bottles in Perth, and customer service in Bank branches?

Bank service costs something – like those people who used to fill your petrol tank for you. It’s easy for people to lament the passing of such service, but they were effectively given a choice. The market gave them a choice. When petrol stations passed the lower costs of self service onto petrol buyers, that’s where the buyers headed. If you ask them if they’d like to see more service in petrol stations they might well say ‘yes’. But that’s if someone else pays. If they are expected to pay, it’s no dice.

The same has happened with banks. Now it hasn’t happened quite like that. Before banks charged for service and for ATM access they had 4% interest margins. Now they have about half that and so they’re charging fees. This doesn’t mean I feel sorry for them, or that they are making lower profits. They’re not. But banks have tried to sell service – ANZ did for a while with various service guarantees. But it obviously didn’t pay them – or they’d have kept doing it.

So what you’re seeing, old chum, is choice in action. People don’t get bank service because they don’t want it – or at least don’t want it enough to pay for what it costs. In the meantime and entirely by the by, they are getting much, much better service IMHO from the banks computer systems and ATMs.

I hope you can see the analogy with the milk bottles. People say they want something, but sometimes they don’t want it enough to pay for it when they’re given the option.

Nicholas, it’s clear to me that you’re happy being shafted for the good of the market, so I’ll wish you well on your way. It’s equally clear that you don’t understand the customer service ethos that I was taught by a Bank which proceeded to abandon that ethos in favour of the easy buck, over the reliable buck.

Oh, and no, I don’t see the parallel between glass milk bottles and real customer service, basically because there isn’t any. Nice analogy, but it’s a disconnect.

Niall, you could always bank with a bank that still offers some level of customer service. Like, say, Bendigo. Or some credit unions. It’s their selling point. If you don’t, it means, like the milk bottles, that you’d rather complain and take the cheaper prices then pay marginally more for the service.

Oh, Nicholas. I used to consider you worthy of engaging, but you seem unwilling to reciprocate, preferring to tell me instead that I’m wrong in my view, and that I need to come over to your side. Sorry, my friend, exchanges of views don’t work that way. At least where I was brought up, anyway.

These so-called technological services were promoted as free and gratis to suck in the populace. There was never any intent by Banks, per se, to maintain those services free and gratis, but of course, the Banks never made that public knowledge until it was too late for those dedicated users.

So what if they promoted that way years ago and not now? Times change. They were obviously using those tech factors as a test run to see if the public used the new technology and they did.

Their overall return , while decent over the past 10 years, doesn’t really suggest they are making super profits. They were aiming for a 20% EBIT for the most part. Considering the long sustained boom their results were not over the top, so you aren’t getting ripped off, Niall. Stop whining.

JC, like Nicholas, you miss my point, but in your case I know it’s wilfully so. Allow me to map out the realities for you. Banking was once centred upon service. Not A service, just service. Caring about and for the customer. It’s called empathy. Listening to your customer, asking relevant questions and ascertaining what your customer wants, and then exceeding their requirements WITHOUT belting them around the wallet in the process. That’s service.

That changed in the eighties, following greed driven drives towards that first billion in profits. It’s been down hill from there because of black monday 1987 and a series of greed driven fuckups ever since. Check into the corporate history of the NAB. They’re expert fuckup merchants. Just like the losing gambler at a roulette table, the urge is to bet more to recover loses although in the case of banks, it’s up the fees and charges because of the dedicated cadre of dummies, like you and Nicholas, who actually seem to believe you’re getting value for money. Unfortunately, you’re missing the fact that what you’re paying for was once free or very nearly so, because banks didn’t have to chase profits in order to make up for loses incurred through imprudent greed. So, all that greed driven profit chasing has been at dramatic cost to customers, like you and Nicholas, who have been successfully brain-washed into believing that a globalised world borne on the soap-sud credibility of ‘market forces’ and ‘competition’ is delivering you fair service for fair outlay.

Too late for you, old cock. You’re already cuckolded. Hope you enjoy the ‘service’ you’re paying through the eye-teeth for, and apparently enjoying. Just think….you don’t need to experience prison to understand how much your arsehole can hate you. Just ask your wallet, or better still, your bank account statement. You know … the one with all of those money-for-service fees listed down the page.

Niall, face it, the world, and the needs and wants of ordinary Australians, have passed you by. You’re clinging to absurd nostalgic notions of service that no one gives a damn about, except perhaps for disgruntled former bank employees who, incredibly, swallowed their bank’s internal marketing. Your view that the entire retail banking customer base has been hoodwinked is quite frankly a load of patronising elitist shit.

I’m curious about one thing: who do you bank with? Don’t be shy now. My guess? NAB.

Before the banking deregulations in the 80s, banking was based on making the customers crawl and beg for even a sniff of a loan. Lend money? You had to prove you didn’t need it first. Sure, if you had a million sitting in your account they would fawn all over you, but if you wanted money… As far as I am concerned,those who decry deregulation are deluded fools, plain and simple. We have a much better service from our lending institutions now then we ever did before.

But seriously, Niall, I reckon you’ll like Bendigo. Go and join up with a community bank branch, and then as well as good old fashioned customer service you’ll have the warm glow that half the profits are going back to the comunity funding all sorts of good works, instead of into the pockets of the capitalist shareholders of the big banks. You’ll like that, I’m sure.

The functionality of our system is maintained only by the states implicit assurance that fiat money will be kept in sufficiently scarce supply. So it is odd for citizens who must hold that money to be denied a way of storing it with complete security at the going interest rate.

I’ll go out on a limb here, but there is no particular assurance that our fiat money will be kept in short supply, nor is there any great link to the functionality of our system. Yes, I agree that when inflation hits Robert Mugabe proportions there is a big problem, but the “fiat” in our money is that government dollars must be used as the medium of exchange, there is no particular fiat that government dollars must be used for the purpose of wealth storage.

Sure, we need to keep a few thousand dollars in a working bank account (typically at ZERO interest) for day to day buy and sell, but that is all just exchange. From a wealth point of view those working accounts are irrelevant. If you happen to believe in gold standard then go ahead and spend your investment money buying gold, if you believe in BHP or CBA then buy shares — for Australians, the investment market is still reasonably free, so we each make decisions about what we believe is the most stable asset (including government bonds if that seems competitive).

I’ll go even further out on a limb and say that there is nothing odd about citizens being denied high security storage of their money at a high interest rate (although the investment bank accounts out there are actually competing pretty hard for citizen’s money right now, so the market is filling this need, let’s ignore for the moment that you get taxed on the interest so you really earn half what it seems you are earning).

Think about it this way: suppose the government stops printing dollars and instead prints “Time Independent Monetary Units” which look a lot like dollars but are actually redeemable for dollars (at any time) with the inclusion of an interest calculation on the TIMU to $ conversion. Today, 1 TIMU is redeemable for $1 but next year the same TIMU will redeem for $1.10 or similar. OK, now people get to enjoy the TIMU so the dollar goes into disuse, but really the TIMU is only based in value on the dollar anyhow so really people are exchanging dollars and collecting interest at the same time (everyone still with me, I hope).

What I’m getting at here is that all the TIMU’s increase in dollar value together, so in effect there is no increase in value at all. We have discovered that money does not create wealth (hopefully we already knew that), money is only a token to annotate the wealth. Thus, the purpose of interest is not creating more wealth (because money cannot create wealth), the purpose of interest is to transfer wealth from one person to another (which money can do very effectively). Having a universal interest rate set for all parties completely defeats the wealth transfer and thus the TIMU becomes just another currency, no different to any other.

Yes, interesting points Tel. I guess my starting point is that there are bonds out there in the marketplace and the internet lets us get them to any old person at low transactions costs. So we should and we should also reconfigure the bonds we issue to address people’s liquidity concerns.